Courtney v. Youngs

• Decision Date: 18 July 1918
• Docket Number: No. 14.,14.
• Citation: 202 Mich. 384,168 N.W. 441
• Parties: COURTNEY v. YOUNGS.
• Court: Michigan Supreme Court

202 Mich. 384

168 N.W. 441

COURTNEY

v.YOUNGS.

No. 14.

Supreme Court of Michigan.

July 18, 1918.

Error to Circuit Court, Iron County; Richard C. Flannigan, Judge.

Action by Joseph S. Courtney, trustee in bankruptcy of the Groveland Mining Company, bankrupt, against George W. Youngs. Judgment for plaintiff, and defendant brings error. Reversed and remanded, with instructions.

The Groverland Mining Company filed its articles of association in the office of the secretary of state August 5, 1907. By such articles it appears that the following named persons were its incorporators and received the number of shares of stock stated:

George W. Youngs (defendant) 2,026 shares

J. H. Bartow 2,026 shares

D. T. Croxton 2,665 shares

W. H. Becker 1,280 shares

Frank W. Youngs (son of defendant) 3 shares

Defendant is a mining man of a number of years' experience. Before the organization of the Groveland Company he was the manager of the Huron Mining Company. Capt. Bartow was the manager of the Lake Erie Ore Company of Cleveland, and was also a stockholder in the Huron Company. The Lake Erie Ore Company is a selling agency engaged in the business of selling ores for mining companies. It was the sales agent of the Huron Company. In conducting its business it makes advances to companies and is the principal creditor of the Groveland Company. Mr. Croxton, a mining engineer, was the president of the Cleveland Furnace Company, engaged in the pig iron business. He also was interested in the Huron, and has other interests. He was for some years the chemist for the Penn Iron & Coal Company. Mr. Becker was in the vessel business. Some time after the organization of the Groveland Company he transferred his shares in the Groveland Company to the Lake Erie Ore Company.

The circumstances leading up to the organization of the Groveland Company were these: Capt. Bartow wrote defendant requesting him to look up a low grade, low phosophorus mining proposition, saying that such a property could be used in connection with the Huron, which was very high in phosphorus. Defendant procured an option on the property in question, which was said to run 47 per cent. iron with a low percentage of phosphorus. The option was procured without expense. The mine had been unsuccessfully worked by two preceding companies; the cause of the failures being in dispute. Upwards of $100,000 had been expended in development and operation prior to the time the option was obtained. The parties who became the incorporators of the Groveland Company furnished, either in cash or notes, the money to unwater the property and install machinery. There is testimony that this amounted to $13,000. The articles of association recite that no cash had been paid in on the capital stock, but that the property conveyed to the corporation consisted on the option which was valued at $200,000. It is undisputed that Capt. Bartow wanted to incorporate the company for $500,000, but that defendant insisted that it should be incorporated for $200,000, which figure was the one finally agreed upon.

The company was unsuccessful. It did not produce a large amount of ore; the ore was said to be refractory, and customers who purchased did not renew their orders. In October, 1913, the company was adjudicated a bankrupt, and plaintiff was elected and qualified as trustee. Its debts aggregate substantially $140,000, of which $117,260.57 is to the Lake Erie Ore Company. On April 28, 1914, the referee in bankruptcy entered an order, pursuant to a petition filed in the bankruptcy proceedings, ordering defendant to pay $17 per share on each share of 1,497 shares of stock held by him within ten days from the date of the order, and authorizing and directing the trustee to bring suit unless the same was paid. This order was entered without personal service on defendant, the order to show cause having been sent him by registered mail, he not appearing. The order, however, contained the following provision:

‘This order is without prejudice to the right of said George W. Youngs to claim upon said suit, if brought against him by said trustee, that the stock is fully paid, or to make any other defenses to said suit that he may desire, it being not hereby intended to conclude him in any respect, except as to the fact that the court has here regularly performed the administrative act of making this call.’

Defendant having failed to pay, this action at law was instituted, resulting in a judgment for plaintiff in the sum of $11,751.55, to review which this writ of error was sued out.

Argued before OSTRANDER, C. J., and BIRD, MOORE, STEERE, BROOKE, FELLOWS, STONE, and KUHN, JJ. A. F. Dixon, of Iron River, for appellant.

John E. Tracy, of Milwaukee, Wis., for appellee.

FELLOWS, J. (after stating the facts as above).

We have recently had occasion to consider a case brought for the same purpose as is the instant case, and in which some of the questions here involved were determined. Grand Rapids Trust Co. v. Nichols, 165 N. W. 667. We shall have occasion to refer to that case as we proceed.

It is insisted that the order of the referee above mentioned, having been made without personal service on defendant, is void and of no effect as to this defendant, and for that reason this or any other suit has not been validly authorized, and may not be maintained. The authorities upon this question are not in harmony; the United States Circuit Court of Appeals of this circuit having set aside a somewhat similar order made upon similar notice by mail, in a direct proceeding for that purpose. In re Haley, 158 Fed. 74, 85 C. C. A. 404. We are impressed, however, from an examination of the authorities, that the making of such an order by the referee in a case of this character without personal service is recognized as the proper practice; that it is determinative of the amount of the indebtedness of the bankrupt and of the amount necessary in addition to the other assets to liquidate such indebtedness, but that it is not res adjudicata of any defenses personal to the defendant; that, while it authorizes the bringing of a suit in the proper forum, it does not foreclose the defendant from such defenses as he may see fit to make.

The statute of limitations is pleaded, although not strenously insisted upon. It is not available. The statute did not begin to run until the order of the referee. Scovill v. Thayer, 105 U. S. 143, 26 L. Ed. 968.

Before proceeding further it is well that we consider the character of this litigation, the theory upon which the case was tried, and the theory under which defendant may be called upon to respond. This is necessary in order that we determine what rights the trustee in bankruptcy possesses, and under which provision of the Bankruptcy Law he seeks to exercise such rights, in order that we may determine the proper forum under our system of procedure in which such rights may be enforced. His powers and rights are prescribed by the act of Congress and are very broad. He has the rights of the bankrupt; in addition he has the right not possessed by the bankrupt, that of pursuing property conveyed by the bankrupt in fraud of creditors, and by the recent amendment he has the rights of a creditor armed with process. In order to determine the proper forum in which he may exercise these respective rights it is important that we understand which of these rights he is here seeking to enforce. For that purpose we must consider the nature of the rights here assorted in order to judge the remedy adaptable.

This is not a suit to recover on a statutory liability, nor, strictly speaking, is it an action to recover an unpaid subscription, nor is it an action brought to recover property conveyed by the bankrupt in fraud of creditors, and which conveyance of necessity operates as a fraud upon all creditors, and the recovery inures to the benefit of all creditors. As we shall presently see, the recovery here does not inure to the benefit of all the creditors, but only to those who have extended credit in reliance upon the capital stock of the corporation. The case was tried and submitted to the jury in the court below upon the claim of the plaintiff that the Groveland Mining Company, acting through its officers and promoters, in fraud of the rights of creditors, had disposed of the property of the corporation, i. e., its shares of stock at a grossly inadequate price, or without consideration, and that under such circumstances the contract for sale and sale of such stock was void, rendering the stockholder liable for the stock fraudulently obtained by them. Where creditors' and other stockholders' rights are not invaded, a corporation, at the time this corporation was organized and before Act 46, Public Acts 1915, was passed, might dispose of its stock at such figure or for such property as it and the prospective stockholder might agree upon. Young v. Erie Iron Co., 65 Mich. 111, 31 N. W. 814;Rickerson Roller Mill Co. v. Farrell Foundry & Machine Co., 75 Fed. 554, 23 C. C. A. 302;Old Dominion Copper Co. v. Lewisohn, 210 U. S. 206, 28 Sup. Ct. 634, 52 L. Ed. 1025;Coit v. Gold Amalgamating Co., 119 U. S. 343, 7 Sup. Ctl. 231, 30 L. Ed. 420. In the last-cited case the court recognized the right of creditors, who had extended credit in the belief that the stock was fully paid, to proceed against the stockholders in case property was fraudulently exchanged for stock, but at the same time pointed out the distinction between such a case and one brought for unpaid subscriptions, the court saying:

‘The case is very different from that in which subscriptions to stock are payable in cash, and where only a part of the installments has been paid. In that...